Hypervestments is the hedge fund at which main character Kaylon works. Located in La Défense, Paris, it has a formidable reputation for beating the market consistently. So much so, that its team discovers several anomalies in the current economic system, which dates back to the Cold War.
As maybe well known among most readers, the Cold War was a struggle between roughly two camps: Communist and Liberal Capitalist. The end result of this conflict, which was not always as non-violent as history books suggest, was a victory of the Liberal Capitalist framework against Communism. It also led to the Unipolar World Order with the US as a global ‘policeman’. A comprehensive writing on this topic can be found in an article of the New Yorker on Francis Fukuyama.
Central to this unipolar framework was to have an economy with rational participants, in which people make decisions to their best knowledge and according to their preferences. This would naturally lead to the best market outcomes and overall well-being in society. To some extent that has been proven true, yet there are anomalies, some larger than others, some in the domain of human rights and some in the domain of property rights. And there are overlapping issues.
Several core assumptions underpin this framework, though somewhat simplified as there are derogations. More details can be found on e.g the Stanford Encyclopedia of Philosophy. Four important assumptions are as follows:
- A good is a good, therefore more of a good is always better
- Participants are rational (nicknamed the Homo Economicus)
- Wealth is the ultimate goal
- Externalities are not taken into account by government as the market accounts for everything
A major crash in this consensus constituted the Global Financial Crisis of 2008. This event (or rather set of events) revealed several shortcomings:
- There are complex financial products which many users do not fully understand, neither do some of its issuers. Think of the CDO and CDO^2 which turned out to contain toxic assets that were (largely) undetected until it was too late. It can safely be concluded that there were gaps in information provision. You can find an explanation of such a construction in this fragment of the Big Short.
- Asymmetric information: An example of this would be the case of Fabrice Tourre, which involved a short position against a portfolio which the issuing party sold to its investors, meaning the issuer had to gain from the investors' losses. You can find more details by searching the case
SEC v Goldman Sachs & Co. and Fabrice Tourre Complaint [Fraud] (US) [10-CV-3229]
This constitutes a form of wrong-way risk that is illegal. Other forms of wrong way-risk are subjected to additional requirements for example by Article 291 of the European Capital Requirements Regulation - Adverse selection: Above scenario also constitutes a form of adverse selection. Another form of adverse selection would be for e.g. a very large bank to lend to troubled governments. If these governments become more troubled and have a deterioration in credit rating, the issuing bank can receive higher interest rates than before, to the detriment of this government. An example of this was when Goldman Sachs provided emergency assistance to the Greek State at the time of entering the Eurozone, as confirmed by the European Parliament in this answer of 28 August 2015.
- Mismatch between real and financial economy: An example of this would be the fact that we have experienced a time during which in Europe alone, in excess of 9 billion Euros have been printed, to some extent an attempt at containing ‘legacy issues’ of the Global Financial Crisis. It is difficult to measure how much of that constitutes Non-Performing Loans since defaulting lenders usually will not announce themselves in advance. The QE programme was initiated to stimulate economic growth, instead it has occasionally resulted in high inflation with hard-to-measure improvements in economic performance. The Monetary Dialogue Papers of 2023 contain a detailed study on Monetary Policy in the Eurozone. https://www.europarl.europa.eu/cmsdata/267598/Final Compilation topic 1.pdf
- State Capture: State Capture is a situation in which an individual economic agent or a ‘clique’ uses economic power to take ‘hold’ of the government under which it operates, becoming effectively a political decision-maker of systemic importance to an extent that becomes incompatible with rule of law. An example would be the bailout of Parex Banka in Latvia, a bank that was in control of oligarchs and collapsed as a result of related lending, meaning loans that have never been paid back.
- Excessive debt: In order to keep the existing economic model afloat post 2008, visible austerity measures have taken place in many European democracies and also the US, such as budget cuts with regard to education. At the same time, a series of financial transactions have taken place to facilitate the bail-out of systemically important financial institutions, some of which are invisible in government statistics (this was visible in the Eurostat report with regard to Latvia of 2017, p. 31, yet can no longer be found within the European Commission's database as evident of above picture).
- Human rights issues: The unipolar world order, though victorious, occasionally turns a blind eye to serious human rights abuses. A notorious example would be the atrocities committed in East-Timor in Indonesia in pursuit of economic and political expansion.
- Black markets: An IMF study of 2021 (Kelmanson et al.) concluded that the European Union has a shadow economy of about 15 to 25 percent of GDP. Eurostat estimates that EU GDP amounts to 17.9 trillion Euros, meaning there may be up to 4.5 trillion Euros worth of black markets.
Above problems affect both the EU and US. In the US, these problems have accumulated to the point that there has been a change in government structure away from liberal democracy. And then there are countries which can be characterised as illiberal and autocratic in the first place.
The EU instead, has liberal democracy as its core tenet, which follows a rationale based on Greek and Roman law, as well as on Judaeo-Christian principles. Both have had a role to play in a tradition of liberalism and humanism, which in turn has contributed to the rise of democracy with the Single Market as enshrined in the Maastricht Treaty.
Hypervestments is a participant in this Single Market infrastructure, therefore resides in the Unipolar Order. However, as observed by above phenomena, that order has begun to alter and crack. So is there no working economic consensus in our liberal democratic framework yet? Somewhat normatively, progress has been reached. One can argue that the Single Market stands for a social market economy and thus there already is an effective consensus. However, above problems indicate there are recurring issues regarding bounded rationality and state capture. And there have been delays in major EU projects such as the Banking Union and Capital Markets Union.
Several trends point at a transformation into a Multipolar World Order with different economic blocs, some of which could be an asset for democracy, law and the market economy, some are catastrophic:
- The rise of BRICS countries as a source of economic potential, mainly with regard to resources and minerals.
- The decision of Russia to invade Ukraine in 2022, resulting in a violent war with an estimated over 1 million casualties.
- The chainsaw policies of Javier Milei in Argentina.
- Increased calls for European harmonisation from within the EU.
Especially that latter element is interesting for Hypervestments, since it is a development it supports, even if for its own interest (but also with a degree of goodwill). The hedge fund therefore has an incentive to defend and strengthen liberal democracy.
Besides its ordinary portfolio activities, it discovers several of the described anomalies in Europe’s markets. Specifically, these include wrong-way risk, over-optimistic credit ratings, illegal off-sheet transactions with governments such as the Greek state. And it also includes outright state capture attempts by a malevolent oligarchic cartel called Imperativo Caligula (this is part of the fiction), which actively goes after opponents that challenge their power, such as whistleblowers, journalists and independent auditors. This too remains a real-life problem.
These people are therefore the first that Hypervestments seeks to provide shelter to, as they have findings that both strengthen the rule of law and the functioning of markets in Europe. Their unofficial mission thus constitutes an attempt to remodel the existing economic consensus to make it fitter and competitive within a multipolar framework.
So what is the link to reality regarding Hypervestments’ approach? There are several scandals and dossiers that underpin Hypervestments’ search for information and solutions, such as the Parex scandal, Egrant Inquiry and Alexandria-Santorini investment constructions. This is a call for a new economic consensus model that radically centres around liberal democracy, resistant to state capture (as well as possible) and receptive of the concept of ‘bounded rationality’. In a less plausible scenario, the EU puts itself at risk of vassalisation by autocracies elsewhere.
A first proposed step in this process, especially regarding bounded rationality, is to cut off corruption and retrieve stolen assets as much as possible while protecting those who take risks to do so. This would make the Euro a currency that reflects market efficiency, low levels of corruption and good human rights protections across the board. Doing so contributes to a productive society and economy based on human positivity rather than on totalitarianism.
To be continued ...
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